Datalink Reports 2004 Fourth-Quarter and Full-Year Operating Results;

Datalink Reports 2004 Fourth-Quarter and Full-Year Operating Results; Company Achieves Profitability in the Fourth Quarter; Results Consistent with Recent Guidance

    Business Editors

    MINNEAPOLIS--(BUSINESS WIRE)--Feb. 16, 2005--

Live Webcast of Conference Call at 9:30 AM Central Time Today, February 16, 2005
    Datalink Corporation (Nasdaq:DTLK), a leading independent information storage architect, reported that revenues for the quarter ended December 31, 2004, rose 23 percent to $26.0 million from $21.1 million in the prior year. The company reported net earnings of $445,000, or $.04 per diluted share compared to a net loss of $2.1 million, or $.20 per diluted share in the year-ago fourth quarter. The net loss for the prior year quarter includes restructuring charges of $1.8 million or $.18 per diluted share.
    Datalink's fourth-quarter revenues and per-share results were consistent with management's updated guidance, which forecasted revenues of $25.8 million to $26.0 million and per share earnings of $.02 to $.04 per diluted share.
    For the 12 months ended December 31, 2004, revenues were $93.3 million, versus $91.1 million generated in the prior year. Datalink's net loss narrowed to $3.1 million, or $.31 per diluted share, from a net loss of $5.2 million, or $.50 per diluted share, for the 2003 12 months. The prior year net loss includes restructuring charges of $2.1 million or $.20 per diluted share.
    Greg Meland, Datalink's CEO, commented, "In 2004, we improved our execution against the key elements of our strategy and positioned the company for accelerated success."

    The company's accomplishments include:

--	Attaining profitability in the fourth quarter; the company grew revenues through increased productivity while cutting costs during the year
--	Growing its customer support business; billings for customer support contracts increased 13 percent from the prior year
--	Improving gross profit margins; gross profit margins were 28.6 percent in the fourth quarter reflecting higher value-add products and services for customers and better pricing from vendors

    The company has effectively positioned its storage solutions to take advantage of the best technologies in the industry, particularly around opportunities with Enhanced Data Recovery (EDR). Datalink's customers are realizing the benefits of having the company's professional services teams deploy disk-based recovery innovations, including tape emulation, disk-to-disk-to-tape, point-in-time copy and replication, to enhance their EDR capabilities.
    Meland continued, "In October 2003, we restructured our business to lower costs and create a more effective organization. Since that time, our operating results have improved each quarter, culminating with a profitable 2004 fourth quarter. Through this difficult operating environment our employees have stayed focused on contributing to the success of Datalink and our customers.
    Said Meland, "While we are pleased with our progress, we are very focused on delivering stronger results this year."

    In 2005, the company plans to:

    -- Further increase employee productivity and improve market
    share in key geographic locations

    -- Grow its revenue base and increase market share in key
    opportunity areas, like EDR and information life cycle
    management

    -- Expand customer support and professional services business
    capabilities and financial results

    -- Generate sustained profitable growth during the year

    Outlook:

    For the quarter ending March 31, 2005, Datalink expects revenues to range from $22 million to $26 million, with a net loss before sublease charges of $.05 to $.13 per diluted share. Datalink expects to incur increased operating expenses in the first quarter of 2005 primarily due to normal recurring costs which are more heavily weighted to the early part of the company's year. The higher costs relate to payroll taxes, public reporting costs and benefit accruals. Datalink also will incur expenses related to Sarbanes-Oxley compliance requirements which will contribute to the expected first-quarter operating loss. These compliance and other costs are projected to decline as the year progresses. Additionally, as previously announced, Datalink will take a one time non-cash charge of approximately $3 million or $.30 per diluted share in the quarter ended March 31, 2005. The accrual primarily represents the difference between the company's original lease payment and the amount it will receive from the sub-lessee over the remaining lease term.
    The company expects to generate increased revenues and return to profitability in the second quarter of 2005.

    Webcast

    A live Webcast of the Datalink conference call to discuss the improved fourth-quarter guidance is scheduled for today, February 16 at 9:30 a.m. Central Time and can be heard via Datalink's Website at www.datalink.com.
    Datalink Corporation is an information storage architect. The company analyzes, designs, implements, and supports information storage infrastructures that store, protect, and provide continuous access to information. Datalink's specialized capabilities and solutions span storage area networks, network-attached storage, direct-attached storage, and IP-based storage, using industry-leading hardware, software, and technical services.

    The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This press release contains forward-looking statements, including our internal projections of anticipated first quarter 2005 operating results, which reflect our views regarding future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions which indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending upon a variety of factors, including, but not limited to: the level of continuing demand for storage, including the effects of economic conditions; competition and pricing pressures and timing of our installations that may adversely affect our revenues and profits; fixed employment costs that may impact profitability if we suffer revenue shortfalls; revenue recognition policies that may unpredictably defer reporting of our revenues; our ability to hire and retain key technical and sales personnel; our dependence on key suppliers; our ability to adapt to rapid technological change; risks associated with possible future acquisitions; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and volatility in our stock price. The company also cannot assure that its cost reduction initiatives and management changes will lead to continued profitability. Further, the company's revenues for any particular quarter are not necessarily reflected by the company's backlog of contracted orders.

DATALINK CORPORATION STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

Three Months Ended Twelve Months Ended December 31, December 31, 2004 2003 2004 2003 ---- ---- ---- ----

Net sales: Products $17,880 $13,801 $63,235 $61,350 Services 8,103 7,272 30,048 29,787 ----------------------------------------- Total net sales 25,983 21,073 93,283 91,137 -----------------------------------------

Cost of sales: Cost of product sales 12,818 10,877 48,568 47,477 Cost of service sales 5,733 4,891 21,175 20,198 ----------------------------------------- Total cost of sales 18,551 15,768 69,743 67,675 ----------------------------------------- Gross profit 7,432 5,305 23,540 23,462 ----------------------------------------- Operating expenses: Sales and marketing 3,588 2,112 12,438 10,985 General and administrative 2,448 2,780 10,366 10,960 Engineering 915 929 3,764 4,220 Restructuring charges - 1,772 (63) 2,078 Amortization of intangibles 65 108 261 724 ----------------------------------------- 7,016 7,701 26,766 28,967 ----------------------------------------- Loss from operations 416 (2,396) (3,226) (5,505) Interest income, net 29 17 83 74 ----------------------------------------- Loss before income taxes 445 (2,379) (3,143) (5,431) Income tax benefit - (276) - (276) ----------------------------------------- Net loss $445 $(2,103) $(3,143) $(5,155) =========================================

Net loss per share: Basic $0.04 $(0.21) $(0.31) $(0.50) Diluted $0.04 $(0.21) $(0.31) $(0.50) Weighted average shares outstanding: Basic 10,298 10,240 10,268 10,227 Diluted 10,298 10,240 10,268 10,227

DATALINK CORPORATION BALANCE SHEETS (In thousands) December 31, December 31, 2004 2003 ---- ---- (Unaudited) Assets Current assets Cash and cash equivalents $12,663 $12,565 Accounts receivable, net 11,485 8,541 Inventories 627 1,969 Deferred customer support contract costs 10,770 7,723 Inventories shipped but not installed 2,343 2,160 Other current assets 284 329 ------------ ------------ Total current assets 38,172 33,287 ------------ ------------ Property and equipment, net 3,134 4,500 Goodwill 5,500 5,500 Intangibles, net 225 485 Other assets 38 45 ------------ ------------ Total assets $47,069 $43,817 ============ ============

Liabilities and Stockholders' Equity Current liabilities Accounts payable $11,031 $10,139 Accrued commissions 1,227 475 Accrued income taxes 109 72 Accrued sales and use tax 510 350 Accrued expenses, other 1,276 837 Deferred revenue from customer support contracts 14,012 9,926 ------------ ------------ Total current liabilities 28,165 21,799 Deferred rent 392 522 ------------ ------------ Total liabilities 28,557 22,321 ------------ ------------

Commitments and contingencies

Stockholders' equity Common stock, $.001 par value, 50,000,000 shares authorized, 10,282,545 and 10,241,963 shares issued and outstanding as of December 31, 2004 and December 31, 2003, respectively 10 10 Additional paid-in capital 26,624 26,158 Deferred compensation (307) 0 Accumulated deficit (7,815) (4,672) ------------ ------------ Total stockholders' equity 18,512 21,496 ------------ ------------ Total liabilities and stockholders' equity $47,069 $43,817 ============ ============

DATALINK CORPORATION STATEMENT OF CASH FLOWS (In thousands) (Unaudited)

Twelve Months Ended December 31, 2004 2003 ---- ----

Cash flows from operating activities: Net loss $(3,143) $(5,155) Adjustments to reconcile net loss to net cash provided by operating activities: Provision for bad debts 6 (34) Depreciation and amortization 1,781 2,092 Amortization of intangibles 260 724 Impairment of customer base intangible - 926 Deferred rent (130) 181 Loss on sale of assets - 10 Stock compensation expense 42 194 Changes in operating assets and liabilities: Accounts receivable (2,950) 3,912 Inventories 1,159 2,340 Deferred customer support contract costs (3,047) 400 Other current assets 45 2,024 Other assets 7 24 Accounts payable 892 (3,528) Accrued expenses 1,351 (117) Income taxes 37 (146) Deferred revenue from customer support contracts 4,086 (631) ------------------- Net cash provided by operating activities 396 3,216 -------------------

Cash flows from investing activities: Purchase of property and equipment (415) (1,096) ------------------- Net cash used in investing activities (415) (1,096) -------------------

Cash flows from financing activities: Proceeds from issuance of common stock 117 111 ------------------- Net cash provided by financing activities 117 111 -------------------

Increase in cash and cash equivalents 98 2,231 Cash and cash equivalents, beginning of period 12,565 10,334 ------------------- Cash and cash equivalents, end of period $12,663 $12,565 ===================

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CONTACT: Datalink Corporation, Minneapolis Investor Relations: Kim Payne, 952-279-4794 Fax: 952-944-7869 e-mail: einvestor@datalink.com web site: www.datalink.com or Analyst Contact: Dan Kinsella, 952-944-3462

KEYWORD: MINNESOTA INDUSTRY KEYWORD: HARDWARE SOFTWARE NETWORKING EARNINGS CONFERENCE CALLS SOURCE: Datalink Corporation

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